Thinking of
Dividends
April 2, 2002
For
stock market investors, there are two components to focus on whenever a
discussion of return arises. The first is capital appreciation which is the
amount that your stock goes up in value and the other is dividends which is the
income stream often paid out quarterly. The sum of these two is called total
return.
During
the bull market that ran from 1982 until 1999, stock investors enjoyed
remarkable returns that far exceeded the historical averages. In fact, the
annualized return over these two decades was 17.7% or 75% higher than the
historical average return of 10% per year.
The
bulk of these gains (1980s - 75.7%, 1990s - 84.4%) came from price appreciation.
This is atypical in that dividends have historically represented a little more
than ½ (about 57%) of the total return achieved.
Why dividends now?
Simple.
Dividends act as a buffer against capital depreciation by helping to smooth out
some of the volatility that has become associated with stocks. The S&P 500
is currently yielding about 1.4%, which is low by historical standards. This
means that the broad market will not provide meaningful shelter for long-term
investors during periods of heightened volatility. In other words, investors who
assume the additional risk of investing in no and low dividend stocks will not
be rewarded for their patience during these challenging times.
I
think that the volatility that we have experienced for the past few years will
be with us for a while longer. With that as our premise for the balance of 2002,
I think it wise to look into companies that pay dividends and to incorporate
total return versus absolute appreciation into our thinking this year.
R.
A. Christy
Please note: The
S&P 500 Composite Index is an unmanaged index that is generally considered
representative of the U.S. Stock market. The performance of an unmanaged index
is not indicative of the performance of any particular investment. Individuals
cannot invest directly in any index. Past performance is never a guarantee of
future results.
Securities offered through
First Allied
Securities, Inc. Member NASD/SiPC
|
